Market Outlook - Global equities: The great divide

US equity market returns are likely to continue diverging along the lines of technology and the rest of the market: the Nasdaq 100 index delivered a 50% return from the post-Liberation Day lows to the end of October while the Russell 1000 Value index rose by less than half that. That outperformance continues a long-running trend (see Exhibit 1).

We believe technology company earnings can continue to appreciate at a robust, albeit slower, pace next year as the artificial intelligence (AI) revolution continues to drive heavy capital expenditure — and eventually profits across all sectors.

AI’s greatest impact will ultimately be in the other parts of the economy as companies implement the technology to drive earnings growth. This will partly come from reducing labour costs; and the US labour market’s flexibility suggests AI will be integrated more fully, and more quickly, in the US than elsewhere.

The Nasdaq’s strong 2025 gains have been roughly in line with earnings growth, meaning that valuations, while high, have not meaningfully increased. By contrast, the Russell index’s gains have outpaced earnings, leading to an atypically high price-earnings (P/E) multiple (see Exhibit 2).

If AI is indeed a bubble set to burst, valuations will quickly fall, but interest rates should not prompt a downturn like they did in 2022 as the Federal Reserve is looking to lower the policy rate next year instead of increasing it.

A benign way that the index multiple could revert towards its mean would be for the index price to appreciate less than the gain in earnings. With forecasts of 15% earnings growth for the Nasdaq in 2026, there is still room for potentially good investment returns even as multiples compress.

This dynamic of prices rising at a slower rate than earnings would also reduce the high multiple for the US small cap index. The Russell 2000 forward P/E is quite elevated, but earnings growth is also very strong, forecast to advance by over 20% next year.

Given the US’s positive macroeconomic backdrop — deregulation, more mergers and acquisitions activity, rising business investment, wage growth, falling policy rates, and low energy prices — we are optimistic these earnings expectations can mostly be realised.

US small-cap stocks are nonetheless unlikely to sustainably best the S&P 500 due to the weight, and long-term superior performance, of the technology sector. But small caps offer another way to access US economic growth without increasing exposure to the tech sector.

Europe’s autonomy

European corporates have struggled in the face of US tariffs, a stronger euro, and increased Chinese imports. The disruption to the international political and economic order unleashed by the new US administration has spurred Europe to try and reduce its dependence on the US, for example by increasing its capabilities in defence — an initiative called Strategic Autonomy.

Many investors are looking for fiscal stimulus directed to infrastructure and defence to boost corporate profits. Indeed, earnings for the MSCI Europe Aerospace & Defense index are forecast to advance by over 25% next year. We believe this initiative will help the region to offset the US tariff drag and assist the reorientation towards a less export-dependent economic model.

To balance growth exposure in portfolios, investors have the choice of the US Russell 1000 Value index, MSCI Europe or MSCI Japan, which all have a similar sector composition. Expectations for earnings growth are also similar for 2026 at 8%, 12% and 13%, respectively.

While there is little difference in the growth rates, Exhibit 2 shows there is a significant gap in valuations. Both US value stocks and Japan have P/E ratios well above average, while Europe seems to offer the best value.

Exhibit 2: Forward price-earnings ratio z-scores

Data as at 11 November 2025. *Calculated from 2010; for all other indices calculated from inception.
** Technology, Broadline Retail, Interactive Media & Services. Sources: IBES, Bloomberg, BNP Paribas Asset Management. 

Emerging markets potential

Low US Treasury yields, and a weaker US dollar, are typically positive factors for emerging market equities. Export-oriented countries, however, may struggle compared to those that can rely on a large, growing domestic market to generate profits.

As in the US, however, it is primarily the technology sector which is generating superior returns within emerging markets. As Exhibit 1 illustrates, the sector has outperformed the rest of the market by an even greater degree than the Nasdaq has outperformed the Russell Value index.

Of the three countries with the largest technology sectors — South Korea, Taiwan, and China — the latter offers greater diversity than the semiconductor-focused markets of Taiwan and South Korea. We believe China’s technology sector has the additional advantage of being somewhat protected from the current trade tensions between the US and China. Technology companies derive a greater share of their revenues from services rather than goods and so are less affected by tariffs. Given the size of China’s domestic market, its high level of engineering talent (for example, the developers of DeepSeek), and desire to develop its own technological ecosystem, we believe technology companies can generate meaningful future profit growth, despite the challenges facing the domestic economy.